How to refinance a VA loan (2023)
Make sure you know the eligibility requirements and costs
Mortgages backed by the Department of Veterans Affairs (VA) carry lower interest rates and more favorable terms than most conventional loans, including no down payment or mortgage insurance requirements.
Even so, some veterans may find it advantageous to refinance their existing VA loan to secure an even better rate, reduce their monthly payments or tap into their home equity for cash. Or, eligible veterans who have other types of mortgages may wish to refinance into a VA loan to take advantage of what it can offer.
Either way, it's crucial to understand the eligibility requirements and associated expenses before proceeding with a refinancing plan.
Key insights
- There are three main VA refinancing options: VA cash-out refinance, VA streamline refinance (IRRRL) and conventional-to-VA refinance.
- VA refinances involve closing costs, which may include a funding fee based on the loan value.
- Refinancing could bring lower interest rates but also an increase in total loan cost when extending the loan term.
Can you refinance a VA loan?
Qualified veterans have the option to refinance their current conventional mortgage into a VA loan. Or, if you already have a VA loan, you can refinance it with your existing lender or a new lender. However, there are specific restrictions regarding when and how VA loans can be refinanced.
For instance, an Interest Rate Reduction Refinance Loan (IRRRL) is only applicable to existing VA loans; you cannot use an IRRRL to switch from a conventional loan to a VA loan. Also, an IRRRL does not permit cashing out any equity.
VA loan refinancing options
There are three main options for VA loan refinancing. The best choice for you will depend on your current loan type, mortgage balance, home equity and financial goals — such as adjusting your loan term, lowering your monthly payments, reducing your interest rate or accessing cash from your home's equity.
VA cash-out refinance
Equity is the difference between your home's appraised value and your outstanding mortgage balance. For instance, if your property is appraised at $300,000, and your mortgage balance is $250,000, you have $50,000 in equity.
Refinancing a VA loan for cash can be helpful if you need money for education expenses, debt consolidation, home renovations or other financial needs.
The underwriting process for a cash-out refinance is usually 30 to 45 days. It also involves a home appraisal and credit check.
VA streamline refinance (IRRRL)
This option is beneficial if you're struggling with monthly payments or looking to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan . A streamline refinance can also modify the loan term — just keep in mind that while extending the loan term may reduce your monthly payments, it will also increase the overall loan cost.
The VA IRRRL is faster and easier than a standard or cash-out VA refinance, as it doesn't require an appraisal or income verification. Additionally, some lenders may allow you to streamline refinance a rental property if you can demonstrate it was your primary residence at some point. Check with individual lenders, as this option may vary.
"A VA streamline refinance is an ideal choice if you're struggling to keep up with your existing monthly payments,” said Leonard Ang, CEO of iPropertyManagement, which provides advice for landlords, investors and tenants. “While it's possible to do this with a traditional refinance, the IRRRL option lets you avoid a formal home appraisal or credit check, meaning that it's a much faster, cheaper, easier-to-get option even for those with bad credit."
Conventional-to-VA refinance
Conventional refinance terms usually state that property owners must possess 20% equity to qualify. But a standard VA refinance allows for refinancing up to 100% of the home's value in cases where no equity has been accumulated.
For example, if your house is appraised at $150,000, and your loan balance matches that amount, you may not qualify for a conventional refinance. However, you would likely meet the criteria for refinancing your conventional mortgage into a VA loan.
VA loan refinance requirements
Refinancing a VA loan has eligibility requirements regarding military service. These requirements include, but are not limited to:
- You served on active duty over 90 consecutive days during wartime or 181 days during peacetime.
- You served at least six years in the National Guard or Selected Reserve.
- You are a surviving spouse whose partner died in service or whose death was caused by service-related disability, and you have not remarried.
Note that you might not qualify if your discharge status is something other than honorable.
The VA does not set any credit score criteria to qualify for a VA refinance. However, most lenders set some kind of minimum. The VA recommends a debt-to-income ratio (DTI) of no more than 41%, although there are exceptions for those with additional sources of income or stellar payment history.
To be eligible, the property must also meet the minimum property standards of the VA, including that the property is structurally sound, safe and sanitary.
» MORE: VA loan requirements
Cost to refinance a VA loan
Each VA refinance has associated closing costs. There's generally no down payment required and no need for private mortgage insurance, but there are other fees.
- Funding fee: The VA funding fee is a percentage of the loan value and is required for most VA refinances. As of publishing, the fee for a cash-out refinance is 2.15% on first use and 3.3% for subsequent uses. For an IRRRL, the funding fee is 0.5%.
- Other closing costs: In most cases, closing costs for a VA refinance are similar to a conventional loan refinance. The VA limits lenders to a 1% flat charge for items that can’t be charged as itemized fees. The VA also stipulates that the lender cannot charge the borrower for attorney or brokerage fees or prepayment penalties. Fees you might pay at closing include:
- VA appraisal fee
- Title examination and title insurance
- Survey fee
- Credit reports
- Prepaid taxes and insurance
- MERS fee
- Recording fees
- Discount points
Pros and cons of refinancing a VA loan
While refinancing can be a strategic financial move, as with any financial decision, there are both advantages and disadvantages to consider. There are also other loan options out there, such as FHA loans or USDA loans, that may be a better fit.
Refinancing into a VA loan
Pros
- No prepayment penalties
- No private mortgage insurance required
- Lower interest rates and closing costs
Cons
- Restrictions on property type and use
- Have to pay the VA funding fee
- Potential for increased upfront costs if rolling funding fee into the loan
Refinancing an existing VA loan
Pros
- Possibly score a lower interest rate
- Secure an easier repayment term length to fit your budget
- Ability to tap into up to 100% of your equity if doing a cash-out refinance
Cons
- Have to pay the VA funding fee
- Increase in total loan cost if extending the loan term
- Home appraisal and credit check required for a cash-out refinance
FAQ
How soon can you refinance a VA loan?
There must be a minimum of 210 days between your first original mortgage payment and the closing date of the refinanced loan. Each lender varies with its requirements for VA loan refinancing; some require 12 months to pass between the first mortgage payment and closing the new loan.
How many times can you refinance a VA loan?
You can refinance a VA loan as many times as you would like as long as you are within your entitlement. Obtaining and refinancing VA loans is a lifelong benefit for qualifying service members.
Do you have to pay a VA funding fee to refinance?
While some service members get a waiver of the VA funding fee if they have a service-related disability, most VA refinance loans require a VA funding fee ranging from 2.15% to 3.3% of the loan, or 0.5% for a streamline refinance. Sometimes, you can roll the VA funding fee into the total loan amount.
What is the max loan-to-value ratio on a VA cash-out refinance?
The maximum loan-to-value ratio (LTV) for a VA cash-out refinance is between 90% and 100%, depending on the lender. If the loan amount exceeds the value of the property, you might have to pay the difference at closing.
Bottom line
Refinancing a VA loan has many benefits. It might offer you the chance to lower your interest rate, lower your monthly payment, change to a fixed interest rate or cash out on home equity.
Before you refinance a home loan, it's important to look at the pros and cons, including factors like how increasing the term length of your loan leads to more interest payments over time. Because each VA refinance loan has its own specific criteria, it’s smart to research lenders and find a program you're comfortable with.
Article sources
- PenFed Credit Union, “ What Is a VA Cash-Out Refinance? ” Accessed Oct. 13, 2023.
- U.S. Department of Veterans Affairs. “ Cash-out refinance loan .” Accessed Oct. 13, 2023.
- Military.com, “ Cash-out Refinance FAQ .” Accessed Oct. 13, 2023.
- U.S. Department of Veterans Affairs. “ Interest rate reduction refinance loan .” Accessed Oct. 13, 2023.
- U.S. Department of Veterans Affairs, “ Chapter 6. Refinancing Loans .” Accessed Oct. 13, 2023.
- TransUnion, “ How Much Equity Do I Need to Refinance? ” Accessed Oct. 13, 2023.
- Military.com, “ 3 Ways to Refinance to a VA Loan .” Accessed Oct. 13, 2023.
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